Abstract:
The purpose of the paper is to revisit the inflation-output gap relationship using a new approach known as the wavelet transform. This approach combines the classical time series analysis with frequency domain analysis and presents the advantages of assessing the co-movement of the two series in the context of both time and frequencies. Using discrete and continuous wavelet methodologies for the study of the inflation-output gap nexus in the case of France, we determine that the output gap is able to predict the inflation dynamics in the short- and medium-runs, and these results have important implications to the Phillips curve theory. More precisely, we discovered that in a discrete wavelet framework, the short- and medium-term fluctuations of both variables are more closely correlated, whereas the continuous wavelet analysis states that the output gap leads inflation in short- and medium-runs.